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November 30, 2012

3 Problems With Buffett’s Higher-Tax Arguments

Buffett is part of a misinformed constituency that believes high-income earners aren’t paying enough taxes

Warren Buffett’s New York Times Op-Ed piece, “A Minimum Tax for the Wealthy,” has created quite a stir. The Omaha, Neb.-based billionaire has railed for higher taxes on what he calls “rich Americans.”

“We need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30% of taxable income between $1 million and $10 million, and 35% on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultra-rich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.”

1) What’s “Fair?”

Buffett is part of a misinformed constituency that believes high-income earners aren’t paying enough taxes. What do the facts show?

Here’s what the Heritage Foundation’s data shows:

“The data show the highest-earning families and businesses already pay the lion’s share of the federal income tax burden. According to the IRS, the top 1% of income earners—those earning more than $380,000 in 2008—paid more than 38% of all federal income taxes while earning 20% of all income. The top 10% ($114,000 and above) earned 45% of income and paid 70% of all taxes. At the same time, the bottom 50% of income earners—those earning less than $33,000—earned 13% of all income and paid less than 3% of federal income taxes.”

Is increasing taxes on the minority of tax payers who already pay the majority of taxes really fair?

2) Tax increases aren’t a panacea

What kind of impact will tax hikes have on the U.S. government’s balance sheet? Will it reverse Washington’s insatiable desire to spend now and ask questions later? Will it substantially reduce the nation’s crippling $16.39 trillion in longer-term debt?

During the last fiscal year, the government spent 22.4% of GDP while it only took in 15.5%. Being a numbers guy, even Buffett concedes that his aggressive GDP-linked targets on taxes and spending won’t stem budget deficits but in fact, continue them.

What psychological effect will more tax revenue have upon lawmakers? Is it possible higher taxes might even encourage higher government spending? Based upon the government’s historical spendthrift pattern, it’s a real risk.

3) Growing the wrong economy

Will higher taxes for upper income earners promote growth of the broader economy? Will it encourage capital investment and spur job growth? Actually, it’s the “informal economy” (code for tax evasion) which is likely to grow the most.

The U.S. government losses approximately$500 billion annually in tax revenue and around $2 trillion of income goes unreported, according to recent estimates.* The typical tax cheat is a male under age 50 in the highest tax bracket. If tax evasion was bad before, how bad will it be in the future? Rather than increasing tax revenues, higher taxes may encourage a new era of even wider spread tax evasion.

Conclusion Perhaps, the cornerstone of Buffett’s misinformed demand for higher taxes is his comparison of previous eras to ours.

He argues “From 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70% - and the tax rate on capital gains inched up to 27.5%,” he says. “Under those burdensome rates, moreover, both employment and the gross domestic product increased at a rapid clip. The middle class and the rich alike gained ground.”

Buffett forgot to mention that five of the worst performance records for stocks over the past 60 years were also recorded during that period. The Dow Jones Industrial Average lost 18.9% in 1966, 15.2% in 1969, 12.8% in 1957, 10.8% in 1962, and 9.3% in 1960. Was the stock market celebrating higher tax rates?

More importantly, the Great Recession is nothing like anything that any other generation of taxpayers or people has faced. Will tax hikes on upper brackets improve the situation? The answer is “yes” if you’re Warren Buffett.

* Richard Cebula and Edgar Feige "America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S